WASHINGTON — What initially appeared to be a listening session by a key federal regulator about access to checking accounts has sparked concerns that the agency may be seeking to go much further in dictating how and when credit unions and banks open accounts for consumers.
The Consumer Financial Protection Bureau held a forum earlier this month on "access to checking accounts" in which it heard from industry representatives, consumer advocates and government officials on how banks screen customers who apply for one.
But in opening remarks, Richard Cordray, the agency's director, delved deeper, raising issues about overdraft protections, how financial institutions report and use credit scores, and gauging a consumer's credit risk.
Though some of these concerns have been raised individually in the past, observers said the speech was a turning point, indicating that the CFPB is taking a system-wide dive into how FIs operate, not just in targeting the underbanked or underserved.
"The CFPB looking into the process of how [financial institutions] screen accounts is pretty much an unprecedented step," said Rich Walker, a managing director at Winterberry Group and former marketing executive at Capital One Financial. "They've been looking at disclosures, fair lending, student lending, overdraft, debt collection and other areas. But when you start to get into the process [used] to open accounts, it's just a very different focus."
To be sure, the CFPB has looked at checking accounts in the past when it comes to areas such as overdraft fees and how checking accounts are marketed to consumers. The agency has also repeatedly warned against lenders and credit reporting agencies sharing inaccurate information about consumers.
Yet Cordray's remarks at the forum were the first time he put all of these issues together. It sparked concerns by the industry, particularly when he suggested the CFPB was looking at how banks and CUs screen a customer to assess their credit risk.
"Banks and credit unions also screen consumers to determine if they pose a credit risk. Now, this might seem counter-intuitive. After all, consumers are opening up a checking account to deposit money and spend it later, none of which would seem to pose any credit risk," Cordray said during the forum. "But most banks and credit unions also have overdraft policies that allow consumers to have negative balances. So the screening system is used to determine how likely it is that the consumer will incur overdrafts and pay them back."
A spokesperson at the agency cautioned that Cordray was not indicating financial institutions should stop screening customers or assess their credit risk.
"We recognize the importance of institutions' risk mitigation work and support the work of our partner regulators," the spokesperson said. "We are especially interested to learn more about how the screening system could be used to help institutions better meet the needs of these consumers, rather than excluding them from the banking system."
Still, Cordray's remarks tying credit risk to overdraft amplified speculation that the CFPB could put more restrictions on overdraft fees and policies when it issues its long-expected rulemaking on payday products.
"One of the things you could read between the lines here is that this could be a preview to the rule that's expected soon on short-term, small-dollar lending," said Donald Lampe, a partner in the financial services group at Morrison & Foerster. "The question is whether that rulemaking is going to cover deposit-advance products or overdraft features" and Cordray's remarks could be "his way of saying overdraft is nothing but credit."
The Oct. 8 forum was also timely considering that a day later, the CFPB cited M&T Bancorp for deceptively marketing a free checking account program. The $90 billion-asset bank based in Buffalo agreed to pay $3.1 million in fines and reimbursement and revise the credit reports of customers whose accounts were closed.
M&T is an example of at least two areas the CFPB warned about during its forum: that it would heavily scrutinize the accuracy of consumer reports and the types of checking accounts being offered to consumers, particularly when it comes to the underserved, underbanked or a protected class of people.
"For consumers who lose their account privileges and are put out of the banking system, they are forced to rely on other ways to manage their financial lives. These alternative financial services, such as check cashing and money orders, often are less convenient, more costly, and have fewer consumer protections," Cordray said. "One interesting area of innovation involves technology that may lead to improved, low-cost transaction accounts, which do not include any overdraft or other credit feature, and which are accessed either through traditional branch networks, or through alternative channels. As these innovations evolve they may change the dynamic considerably, especially if we can ensure the same kind of robust consumer protections that the law imposes on checking accounts offered by banks and credit unions."
Most observers said part of the reason the CFPB is looking into this area now is that there are broader regulatory concerns with so-called specialty consumer reporting agencies that are outside the main three credit reporting agencies. These agencies typically have databases on how many times a consumer overdrew their account or wrote a bad check.
During the CFPB forum, Cordray said the information these agencies provide is "primarily derogatory about a consumer" and the system lacks not just accurate, but consistent information being reported by FIs across the board.